Question

On January 1, 2021, the Allegheny Corporation purchased equipment for $295,000. The estimated service life of the equipment is 10 years and the estimated residual value is $20,000. The equipment is expected to produce 280,000 units during its life.

Required:
Calculate depreciation for 2021 and 2022 using each of the following methods.

a. Sum-of-the-years'-digits.
b. One hundred fifty percent declining balance.

Answer 1

a.

2021 = $50,000

2022 = $45,000

b.

2021 = $275,000

2022 = $0

Step-by-step explanation:

a. Sum-of-the-years'-digits.

Sum of digits for the 10 years will be :

Year 1 = 10

Year 2 = 9

Year 3 = 8

Year 4 = 7

Year 5 = 6

Year 6 = 5

Year 7 = 4

Year 8 = 3

Year 9 = 2

Year 10 = 1

Sum of Digits = 55

therefore,

2021 depreciation = 10/55 x ($295,000 - $20,000)

= $50,000

2022 depreciation = 9/55 x ($295,000 - $20,000)

= $45,000

b. One hundred fifty percent declining balance.

2021 depreciation = 150% x ($295,000 - $20,000)

= $412,500

Can not be charged above book value of $275,000

2022 depreciation = 150% x ($295,000 - $20,000- $412,500)

= $0